Because Mainstream Personal Finance Advice Is Not What It Should Be

My very unscientific survey of the personal finance blogosphere finds Dave Ramsey to be the most often cited guru. This is a bit of a difficulty for me, because of the major gurus he is the one with whom I am least familiar. For example, until last night I had never heard his voice. If you are wondering how that could possibly be, that’s because you didn’t realize how regional his appeal is, and you live in Ramsey Country.

I had to go on his website to hear his show. According to the site, it is carried, on tape delay, on an AM station in Boston. I’d never heard of the station before and it doesn’t come in on my radio. (Also according to Ramsey’s website, the show is not available in New York City, the nation’s largest media market, at all.) It is available on XM and Sirius, but even I am too frugal to pay a monthly fee to listen to the radio.

Turns out he sounds like a likable guy, somebody I wouldn’t mind having in the next seat on an airplane. This is in contrast to, for example, Suze Orman. On reflection, I think that the principal difference between Ramsey and Orman may be cultural. They have very similar core messages. But the Nashville-based Ramsey is Christian in the wholesome American family values way. The San-Francisco-based and gay Orman, who refers to herself as a “57-year-old virgin” is really not. Ramsey’s on-air persona is that of the amiable but firm wise uncle. Orman is the busybody mother-in-law.

Yet they preach largely the same message and leave no doubt that they don’t really think that much of their listeners/viewers/readers. Both apparently regard the audience as the equivalent of children, for whom everything must be simplified down to the barest absolute instruction, without any subtlety, lest the innocents misunderstand it and do something really stupid.

Ramsey is, as far as I can tell from the blogs, best known for his “Seven Baby Steps” program for financial success. I suppose the word baby is meant to reassure that the steps are easy, but the choice of term is a bit, well, demeaning, don’t you think? (And babies don’t walk all that well. Actual baby steps often result in bruises and prolonged crying spells.)

Reviewing and discussing the Seven Steps is apparently a traditional staple of personal finance blogs. Bible Money Matters did a series in February and Moolanomy had a long post in March, to name two relatively high-profile recent examples. And who am I to ignore such an august blog tradition?

The steps, from Ramsey’s website, are:

1,000 to start an Emergency Fund

Pay off all debt using the Debt Snowball

3 to 6 months of expenses in savings

Invest 15% of household income into Roth IRAs and pre-tax retirement

College funding for children

Pay off home early

Build wealth and give! Invest in mutual funds and real estate

Of course, I’m as interested in what others have said about them as what Ramsey instructs his charges to do. And I’m only going to talk about the even numbered ones, 2, 4, and 6 as wells as the last one, 7. The other three, 1, 3, and 5 are bland and uncontroversial. And what’s the fun in that?

You’ve never heard the term “baby steps” before? Google it! There was even a movie with Bill Murray called “Baby Steps”. The concept is that you don’t get from where you are standing to the other side of the room in one giant step. You have to take smaller steps. It’s a common term and not at all implying that the audience are “babies”. It’s common figure of speech.

You might think his advice is overly simplistic and that he talks down to his audience if you only ever heard a few minutes of him from his web site. I’ve been listening to him for about a year now, so I think I’ve seen a fairly broard range of advice depending on people’s situation.

The thing about Dave’s plan is it doesn’t change with the seasons. The advice he gives to one person is the same advice he gives to another in the same situation. If you listen to him 5 years ago, the advice would be the same as today. He doesn’t say, “Well, given that the economy is so bad, my advice is…”

You really can’t call “do not borrow money ever” bad financial advice. I’m looking forward to seeing what there is to pick on.

I really hope you find something legitimate and don’t go for the usual criticisms. Those are usually straw men that are easily knocked down.

My problem with Dave is that he’s so strongly anti-credit. The fact is that good credit is essential. No, you don’t have to borrow yourself into a hole. But we live in a world where the reality is that the interest rate you pay on any given loan, the premium you pay for car insurance, and even the job you get or don’t is based, at least in part, on your credit score. Having good credit, versus bad credit or no credit, can literally translate into saving thousands of dollars. By downplaying this, Ramsey is doing his audience a disservice.

A part of that disservice is his promoting of debit cards. The fact is that debit cards don’t carry the consumer protections that credit cards do, if stolen your money is tied up if someone drains your account with POS purchases. Those things among other problems with debit cards. I can’t take Ramsey seriously.

Hah. Funny you should bring this up. Until a few months ago, I’d never read or listened to anything by Dave Ramsey either. (And I’ve spent quite a lot of time over the last several years reading and listening to personal finance info.)

I figured I should check him out given how much people talk about him.

My takeaway was basically: “Seems like a nice guy. Sounds like pretty good advice.” (He was talking about the importance of diversification.) That said, I’ve never been back to read more.

Oddly enough, my sister (who lives in NYC) is a big Ramsey fan. She downloads the podcasts to her ipod apparently.

The whole “good credit” is a part of everyday life is a bunch of crap. A very, very low percentage of jobs look at actual credit score. Most are high-paying financial sector job and even those usually look at the overall report instead of a just a score.

Around 80% of insurance companies use credit scores. Leaving 20% who don’t if you want to shop around. All my credit cards are canceled, and my credit score is above 750. Would it be higher with a credit card and a small balance… you bet.
But this notion that somehow credit is a part of our normal culture is dangerous and irresponsible. We should be pushing people away from credit, not making excuses for why it’s a good idea.

I think the best way to get a full feeling for Ramsey’s theories is to read his book The Total Money Makeover. I read it in December and it was really eye-opening (and an easy read). I read it before I even knew he had a radio or TV show. It made it easier to understand what he was talking about.

I think the reason that Dave talks down to people on his show is because he HAS to! I’ve probably watched about ten of his TV shows and most of the people who call really do seem to need things simplified for them. If I had to guess, he’s probably gradually adjusted his style of presentation over the years to adapt it to his audience. In general, they are not the most highly educated or sophisticated people (which sounds snobby, but is really just an honest appraisal).

Many of his calllers make their bad financial decisions based on emotional weakness and limited knowledge. Baby steps and message repetition are likely to be more effective with this crowd. Nuanced explanations of market forces won’t work too well with a crowd of people who tend to disdain “book-learnin’”

In general, what I take from Dave’s advice is this:

Stop whining and making excuses and go do
something about your financial problems.

It’s a message that quite a few people these days really need to hear.

To be honest, I’ve never heard of Ramsey, so I can’t really comment on him, although his 7 Step list seems to echo a lot of other financial advice I’ve read.

Personal finance is just that – [i]personal[/i]. Developing blanket statements for the masses is fine, but it won’t always work best for everyone. I think those 7 Steps are a good starting point if people are new to the subject.

I’m not really familiar with Orman either, but she’s becoming a regular on Oprah, and she happened to be on last night. She said that people should no longer try to pay off their credit card debt, but rather concentrate on a 6-9 month “emergency fund”. I personally think this advice is foolish on several levels, but maybe there’s a reason people aren’t good with personal finance. Maybe it [i]scares[/i] them. And maybe “baby steps” are a better way of winning confidence instead of stating “hurry up and get $15k in a savings account” and watch them either scramble or give up before they even start. That’s a daunting task for anyone… nevermind those who are up to their nose it debt! People want immediate results and an easy to accomplishing that is making tiny, incremental steps towards a goal so they don’t get discouraged along the way.

I was shocked by the reactions of the audience when she was stating that a dual-income family should try to live off of one income. You’d think these people were asked to kill a puppy or something! There is an underlying sense of entitlement in society today. We’re all entitled to two cars (plus a toy Porsche, of course!) in the garage of our 5-bedroom house. We’re all entitled to the best of the best so we can one-up our neighbors’ possessions. However, we’re never interested in actually [i]working[/i] for these luxuries (dare I use that word?). We want it now and the banks/credit card companies lick their lips and smile as we borrow and swipe.

You don’t need to be an acclaimed financial guru to know that living an unsustainable lifestyle is detrimental to your personal finances. Live within your means! The majority of the public (who do not read blogs like this, mind you) just don’t [i]get it[/i]. And until they wake up and smell the shit pile they’ve landed themselves in, take the blame for it (no one forced you to charge your Porsche payments to your credit card), and honestly start to live a responsible, smarter financial lifestyle, we’re going to continue this bubble/burst roller coaster ride.

The next problem is to get it all this advice to stick and not escape out the other ear. Remember last year when gas was so expensive we were going to invest in green energy, drive all of our SUVs off a cliff and replace them with hybrids and change the world? With oil floating at $40/barrel, where have all the new-found tree huggers gone? They’re probably off to the dealership trying to get the best financing in decades on a brand new Hummer. I’m afraid this spotlight on finances is just the flavor of the week. What a shame.

James – I work for a bank. Debit cards have the same protection as credit cards. This is required by federal law. My debit card was hacked a few months ago. The bank picked up on it before I did and blocked my card. Because I work there, I was able to see that they blocked 20 unauthorized purchases which never hit my account. I was promptly reimbursed for the three that did get through.

ok here is some detailed anaylsis to back my bad opinion of dave ramsey

Item 1 he put a utube video on that states credit cards are a bad thing and he puts down a guy that pays his bills with his credit card and then pays the bill off each month. I find that stupid as I do the same thing, but I use a 1% cashback credit card and make 120-200 a year just by paying my stinking bills.

plus it raises your credit score when you show the consistant ability to take on a debt and pay it in full every month.

feel free to google my screename

dave ramsey is rich because christian sheep buy his books

the same christian sheep that voted repub in 1981 and 2001 and gave us the boys who gave us 2 bubble burst recessions in a row

yet these same sheep are singing vote repub for 2010 and dave being a Christian CONservative will vote repub to

I generally agree with Ramsey, but I disagree on CC use. “Debit cards have the same protection as credit cards” may be an accurate statement, but carries the same caveats as CC’s. The main one is that (and I have had this happen twice with different banks) – if someone fraudulently uses your account, both the CC and DC companies investigate the claims. This can take up to 60 days. The CC will not add these charges to your bill nor will they charge interest, fees, etc. The DC will, however, not instantly put your money back, they complete the investigation. This, in my cases, took 1-2 weeks. Fortunately, I am on “baby step 8″ and can absorb the momentary loss. Some of the people in Ramsey’s world living on the edge would not survive this.

I appreciate the debt snowball tactic, specifically how Ramsey advises going through it. If you are talking to the masses such as Ramsay, the one thing everyone falls short of is certainly drive. The majority of people needs to be encouraged to keep proceeding, therefore start with the tiniest debt and pay it back first.

I think that much of what Ramsey says is basically common sense put in an easy to use format. I do not know enough about finance to say if he is right or wrong. I do not take everything he says as the total truth. Having said that, I also think listening to people with ‘financial know how’ is scary, since these were some of the people who almost caused our whole economy to collapse. This blogger describes himself as a bitter out of work financial person – wonder why he is unemployed?

Good day! I could have sworn I’ve been to this site before but after checking through some of the post I realized it’s new to me.
Anyways, I’m definitely glad I found it and I’ll be bookmarking and checking back often!

Disclaimer

All advice in this blog is guaranteed to be worth at least what you paid for it, or double your money back. All persons dealing with matters of personal finance are advised to gather information from blogs, books, radio and TV, consult with professionals, discuss the matter with anybody who will listen, and then make their own decision. Because it’s their money.